Question

On January 1, 2016, Pride Corporation purchased 90 percent of the outstanding voting shares of Star, Inc. for $429,000 cash. The acquisition-date fair value of the noncontrolling interest was $47,700. At January 1, 2016, Star’s net assets had a total carrying amount of $333,900. Equipment (eight-year remaining life) was undervalued on Star’s financial records by $54,400. Any remaining excess fair value over book value was attributed to a customer list developed by Star (four-year remaining life), but not recorded on its books. Star recorded net income of $47,600 in 2016 and $54,400 in 2017. Each year since the acquisition, Star has declared a $13,600 dividend. At January 1, 2018, Pride’s retained earnings show a $170,000 balance.

Selected account balances for the two companies from their separate operations were as follows:

	Pride			Star
2018 Revenues	$	338,700		$	193,900
2018 Expenses		238,200			132,700

Assuming that Pride, in its internal records, accounts for its investment in Star using the equity method, what amount of retained earnings would Pride report on its January 1, 2018 consolidated balance sheet?

Answer 1

Under Equity method the parent retained earning would be consolidated retained earnings because subsidiary retained earnings was eliminated against the investment balance and Non-controlling interest. Hence pride retained earnings as on 01/01/2018 i.e.$170,000 would be consolidated retained earnings as on 01/01/2018.

Consolidated retained earnings January 01, 2018

$170,000